The Apple Inc. Stock Pullback Explained

At this point, there seems to be plenty to be optimistic about if you're an Apple shareholder, particularly given how successful the iPhone 6 and the iPhone 6 Plus phones appear to be following their launch. The company has tapped into significant pent-up demand for larger-screened iPhones, and it also doesn't hurt that the new models offer other solid upgrades from the prior generation iPhone 5s.

All of this led to Apple stock rallying to a 52-week (and all-time) high of $119.75 before pulling back a bit. As of writing, Apple's shares most recently traded at $108.22, a nearly 10% pull-back from the high achieved in late November.

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While 10% may not seem all that interesting in and of itself (tech stocks move by this amount all of the time), such a move is very interesting in the context of the company's market capitalization. Let me explain.

What's 10% off of $119.75 per share mean, exactly?At $119.75 per share, and at a share count of approximately 5.86 billion, Apple's market capitalization topped $700 billion. To put into perspective just how large that is, that's larger than Microsoft (currently trading at a $387 billion market capitalization) and Intel (currently trading at a $174.5 billion market capitalization) combined.

Now, what's even more interesting is that the 9.6% decline from the company's 52-week high represents an erasure of nearly $60 billion in market capitalization! Conversely, this means that on the way up over the last several months, Apple had been tacking on tens of billions in market capitalization.

Should a megacap like Apple really see its market valuation swing so wildly? What's really interesting to think about is that a company like Apple, which is large, relatively mature, and so well understood can continue to see these kinds of "big" swings in its market capitalization. However, upon reflection, these big moves (either to the downside or to the upside) make a lot of sense based on the fundamental nature of Apple's business.

Apple is a consumer electronics company that has seen extremely robust levels of profitability from the sales of a relatively small set of products. That's not to say that this profitability isn't deserved -- Apple has done a lot of things from a business perspective that its peers aren't likely to replicate any time soon -- but it's a far less predictable business than, say,Qualcomm .

To illustrate the point, note that Qualcomm and Apple can both say that they profit from the smartphone boom -- but thewaysin which the companies extract that value are quite different. Apple depends on the health of the high-end smartphone marketandon its ability to defend/grow its market share position within that market.

Qualcomm, on the other hand, sells components into most of the world's smartphones and collects royalty fees on each 3G/4G device sold. Apple's profit potential is much higher since it can make far more selling high-margin phones than Qualcomm can either selling chips into phones or collecting royalty fees from smartphone vendors.

On the other hand, as long as the smartphone market as a whole grows, and as long as Qualcomm can develop competitive processors, its chip and licensing businesses should continue to grow. This makes Qualcomm's business mostly dependent on the overall smartphone market, which is easier to forecast than market share shifts among a number of players in the highly competitive market.

It is this lack of predictability for Apple's business, in my view, that leads to these sizable moves (in absolute dollar terms) in Apple's market capitalization in spite of its megacap status.